On 25 August, Berkshire Hathaway Inc., Warren Buffett's investment company, agreed to sink $5 billion into Bank of America Corp, the beleaguered financial giant. The deal helped allay fears that America's biggest bank needs a fresh infusion of capital to withstand mortgage losses and another downturn in the economy. The investment was both fresh capital and a market signal -- a reputation thing, if you will.

By accepting the investment, Bank of America CEO Brian Moynihan was backing down after adamantly maintaining the he didn’t need additional capital. His capitulation could have been a signal that Bank of America was in as much trouble as stakeholders were assuming and give further life to an ongoing reputational crisis. It could have been an expensive capitulation. As reported in the 22 August issue of Agenda, a Financial Times service whose content is directed towards corporate board members, the median cost of a reputation event is 7% of market capitalization. Fortunately, it appears that the converse is true.

The Los Angeles Times (Aug 25, Reckard) acknowledges Buffet’s history of reputation restoration investments:
...when federal authorities accused Salomon of trying to corner government securities markets, Buffett wound up stepping in as chairman of the company to save its reputation and get it back on track. For Bank of America, Buffett's investment should help put to rest some of its own reputational damage.

Reuters (Aug 26, Baldwin) reported Warren Buffett showed again that his name and money is enough to give a struggling company instant credibility in the market. But the legendary investor also demonstrated his canny command of that reputation means that such deals can immediately generate profits.

Turning to the numbers, the Steel City Re Corporate Reputation Index shows an early appreciation of the investment of equity investors, and some general positive movement among all stakeholders in general. Over a period when the median value of the sector was flat, the Berkshire investment created an additional 9% of market value.

But what a reputational ride. Over the past few weeks, the company's reputation rank has dropped from around the 53rd percentile to the 4th percentile among the 96 peers in the Major Bank sector. Its exponentially weighted moving average reputational volatility peaked at 426% and its trailing twelve week reputational vector dropped to -23.6%. Only the reputational velocity indicated a break in the pattern with a rise this past week to a negative 50%.

In strict financial terms, over the trailing 12 months, its return on equity -- including the Thursday bump -- was 26.33% below the median of the peer group.

The Berkshire investment underscores the limitations companies face today in signalling to their stakeholders that "things" are better than they may appear, or stated in reputational terms, that stakeholders' intuitions may be excessively and unreasonably negative. OK, they can accept an expensive investment from Warren Buffet. Goldman Sachs saw the value of that last year. What else? They can improve their credit rating from S&P -- although Bloomberg did hint only recently that the rating agencies opinions (ratings) may have become irrelevant. They can point to their CEO's salary as evidence of leadership quality? No. They can point to their affordable D&O insurance? Not Bank of America. Crank up the PR machine?

You get the point. The value here is that a third party -- Berkshire Hathaway -- stepped in and "bet" on the come in a big way specifically for the purpose of signalling that there was significant upside potential.

The New York Times reports today that major lenders are backing off from companies that present the potential for material environmental risks. It's a reputational thing.

According to the report by Tom Zeller, "After years of legal entanglements arising from environmental messes and increased scrutiny of banks that finance the dirtiest industries, several large commercial lenders are taking a stand on industry practices that they regard as risky to their reputations and bottom lines." Major financial institutions now factoring sustainability issues into their lending decisions include Wells Fargo (NYSE:WFC), Credit Suisse (NYSE:CS), Morgan Stanley (NYSE:MS), JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citibank (NYSE:C), HSBC (NYSE:HBC), and Rabobank (AMS:ROBA).

In the parlance of the Society, it appears that sustainability policies and practices are emerging as material credit risk factors. And for those of you who were wondering what all the fuss is about at the Society, this is an example of what we mean by "intangible asset finance."